Are you competing against non-compliant LO compensation plans? Looking at your policies & proced
Today we'd like to discuss what we're seeing regarding non- compliant mortgage loan originator compensation plans; the timing on reviewing policies and procedures; and the advantages of partnering with an HFA.
Non-Compliance with LO Comp
A typical call from a client trying to recruit or retain LOs STILL goes like this: "It is hard to compete for LOs against other lenders who are not following the rules and compensating LOs based on profits." A compensation plan where LOs are paid a higher commission for higher-margin loans is 100% out of compliance with the federal LO comp rules. While we've seen numerous LO comp plans that need revision this year, we haven't run across any so blatantly non-compliant. Indeed, this plan would rise to the level of being intentional (which may increase fines, while "good faith" may reduce fines). It is possible there is a gap between the actual comp plans and what our clients are hearing (between recruiters and LOs) - think of the game Telephone. There is another possibility: that this practice exists but is not written in the contract. For example:
There are two loan officers at a bank. One earns 70BP on volume, the other earns 100BP on volume. Now there might be legitimate reasons for the difference such as seniority, larger volume, or better quality loans. But it is possible there is an unspoken (or at least unwritten) understanding that one LO earns a higher margin because he/she has a history of closing more profitable loans. Although harder to prove, this is still a violation of the LO comp rules.
In addition to reminding your LOs that the grass isn't always greener (and if it is, it might just be well-fertilized) ... it might be worthwhile to remind them that LOs could be held personally liable under these rules, so it is in their best interest to work for someone taking this seriously.
We've discussed LO comp in light of 2014 changes before, here and here, and are always interested to hear from you on this issue. Calls or emails are welcomed and encouraged.
Good time to look at policies & procedures
Before the spring market hits, now may be a good time to review and revamp existing policies and procedures. Not only will this, as a practical matter, limit your risks of fair lending and other non- compliance, it is probably necessary anyway to adjust for ATR/QM. No doubt your board has already voted on changes, and if not, will be doing so very soon.
This is especially true as some regulators are saying their primary focus this year from an ATR/QM standpoint will be policies and procedures. Of course, we can't understate that the real risk is not regulatory enforcement, but instead putting toxic loans on the books
- loans that investors assess for risk, rather than credit. As many loans should fit easily within QM (especially small creditors).. simply getting the documentation right may be the most important issue, and the loans you will regret tomorrow are the loans that should have been QM today, but weren't, only because of errors in details.
Housing Finance Agencies
Depending on your non-QM lending policy, Housing Finance Agencies (MassHousing, New Hampshire Housing, Mass. Housing Partnership) might be pretty attractive this year. If you will only offer non-QM loans based on a strict set of compensating factors, how do you look from a CRA or fair lending standpoint? Revamping your relationship with an HFA or two may help from this perspective (not to mention from the standpoint that this is a purchase-oriented market).
Remember, loans to HFAs are exempt from ATR/QM. The reason for this exemption was that HFAs served borrowers in need and already maintained stringent underwriting and documentation standards, i.e., they were not to blame for the 2008 crisis.
One reader commented: "Many lenders got fat, dumb, and happy during the refinance boom. Now they need to make adjustments. There are people/borrowers in need out there. Low credit scores but strong futures, they want the American dream! The problem is that these 'refi junkies' don't know how to help them ... they don't know how to manage the credit, collateral, and compliance risks." Well, partnering with an HFA may be one step in the right direction.
Non-QM Buyer?
No promises on pricing, but we were contacted by an out-of- state company with an interest in non-QM hybrid ARMs originated in New England. Minimum pool size $5 million. Looking to sell servicing released. Please contact Steve Venti at 781-356-2772 or sventi@scapartnering.com for more information.
In other news:
The GSEs have paid back US taxpayers?
Tellers (safe behind protective glass) laugh at would-be bank robber armed with only a meat cleaver and a cell phone (don't you wish this is how all attempted robberies ended up?)
Compliance and QC people aren't always the most popular - they often bring bad news, and are not there to congratulate you when things go well. Afraid to speak up to your boss? Don't worry, a good boss hired you because of your skills, and will want to hear your concerns. It's important to be respectful, but remember what Plutarch said,
"I don't need a friend who changes when I change and who nods when I nod; my shadow does that much better."
Thanks so much for reading our weekly newsletters. We're not always going to be perfect, but because we always do our best and try not to overpromise, we hope that we're always going to be trustworthy. Your calls and e-mails are very helpful - please keep contributing.
**These are our opinions. We're not authorized, or willing, to express those of others.**